Report: High taxes and debt to hit Kenya's economic growth

Treasury Cabinet Secretary Njuguna Ndung'u. [Edward Kiplimo, Standard]

High taxes, increased fuel prices and rising debt are threatening to cripple Kenya’s growth, even as the economy is expected to expand by 5.2 per cent in 2024.

A report by consultancy firm Deloitte published December 13 foresees that the country’s gross domestic product (GDP) will accelerate at 5.2 per cent anchored on improved agricultural production and related exports as well as growth in the services sector.

Tourism is also expected to play a role in this growth, according to the East Africa Macroeconomic Publication.

“However, we remain cautious in our assessment as increased tax rate, higher fuel prices, slower global economic growth and heightened debt levels could impact consumption, investment and overall economic recovery,” Deloitte says in the report.

The report also covers Tanzania, Ethiopia, the Democratic Republic of Congo (DRC), Rwanda and Uganda.

Of the six countries, Kenya’s economy will register the slowest growth in 2024 compared to Uganda’s 5.5 per cent, Tanzania (6.1), Ethiopia (6.2), Rwanda (7.1) and DRC (6.4).

The average growth for the region is projected to be 6.3 per cent.

While Kenya’s expected growth is an improvement from the projected 4.5 per cent in 2023, the report cites several challenges among them high taxes that could impact this trajectory.

The economy has been fighting to get back on track since 2021 when it grew by 7.5 per cent.

“Higher interest rates are expected to raise the cost of borrowing, reduce credit uptake, and limit consumption and investment,” the report says.

“In addition, the increase in government taxes and fuel prices is expected to inflate input costs and product prices thereby exerting additional pressure on household disposable income.”

Besides inflation, accelerated mainly by food and fuel prices, the report also cites the depreciating shilling as a factor.

As a result of the falling shilling, annual inflation as at September 2023 stood at 8.0 per cent compared to 7.1 per cent last year.

“Fuel inflation remains persistent mainly owing to the gradual increase in pump prices by the government, which could be aggravated by the removal of fuel subsidies,” says Deloitte.

Debt stock figures as at December 2022 stood at Sh9.2 trillion, with the report indicating foreign loans as the pain points, a factor that has been worsened by the falling shilling.

“In the last three years, the Kenya shilling has depreciated by 31.1 per cent against the USD, moving from an average exchange rate of Sh106.4 per dollar in 2020 to Sh139.4 in 2023, which translates to increased cost incurred to service debt,” the report says.

On public debt to GDP ratio, Burundi is expected to record the highest at 71.7 per cent in 2023, followed by Rwanda (69.5) and Kenya (66.4).

DRC is expected to record the lowest public debt to GDP ratio of 16.7 per cent.

“Most East African countries are facing challenges in public debt management due to low tax revenue collection, high interest on external loans, the funding squeeze from developed countries and currency depreciation, which will lead to higher debt repayments since most of the amounts borrowed are denominated in foreign currency,” the report says.